Tax Policies for Low-Carbon Technologies

This paper discusses the difficulties of achieving climate change policy goals with low-carbon subsidies as opposed to using taxes to raise the price of carbon-intensive activities. First, subsidies lower the cost of energy, and thus encourage consumer demand responses that work in opposition to the goal of reducing emissions. Second, it is difficult to achieve technology neutrality with subsidies. Third, many subsidies are inframarginal. Finally, subsidies often suffer from unintended interactions with other policies. The paper concludes with some observations on the use of price-based instruments and discusses how a carbon tax could be designed to achieve environmental goals over a control period.